August 17, 2016 by Mark Hammerstrom
Financial headlines continue to point out the rising amount of consumer debt. It is rising very rapidly, and is at historic highs. Just a few months ago, the New York Federal Reserve came to the conclusion that the economy was in good enough shape that consumers could afford to pay it off. Never mind if they had little or no savings (a surprising number don’t), they are employed and are paying their debts. New debt statistics certainly seem to warrant raising a warning flag to at least a yellow. Does this or does this not spell trouble ahead?
The ongoing debate reminds me a little of the timeless Monty Python “Dead Parrot” sketch, featuring Michael Palin (pet shop owner) and John Cleese (customer, Mr. Praline):
Mr. Praline: Never mind that, my lad. I wish to complain about this parrot what I purchased not half an hour ago from this very boutique.
Owner: Oh yes, the, uh, the Norwegian Blue…What’s,uh…What’s wrong with it?
Mr. Praline: I’ll tell you what’s wrong with it, my lad. ‘E’s dead, that’s what’s wrong with it!
Owner: No, no, ‘e’s uh,…he’s resting.
Mr. Praline: Look, matey, I know a dead parrot when I see one, and I’m looking at one right now.
Owner: No no he’s not dead, he’s, he’s restin’! Remarkable bird, the Norwegian Blue, idn’it, ay? Beautiful plumage!
Mr. Praline: The plumage don’t enter into it. It’s stone dead.
Owner: Nononono, no, no! ‘E’s resting!
Debt collection is our business, and keeping our customers appraised of changes in the credit environment is very important; especially as it relates to managing or maintaining vigilance with regard to the level of their bad debt.
With consumer debt rising, limited savings to draw on, increasing costs for healthcare as well as indeterminate economic signals the question is: Is the parrot, dead or merely…resting?
Recently Alistair Gray of the Financial Times posted an article entitled: “US $18 billion credit card debt spree sparks fears.”
Mr. Gray asserts that “U.S. banks have ramped up lending to consumers through credit cards and overdrafts at the fastest pace since 2007, triggering concerns that they are taking on too much risk in a slowing economy.”
He points out that “The industry has piled on about $18 billion of card loans and other types of revolving credit within just three months, as consumers borrow more and banks battle for customers with air miles, cashback deals and other offers.”
Among the factors leading to the raising of a warning flag include the U.S. election which has added much uncertainty to the economic outlook, potentially impeding growth for the rest of 2016. As he says this increases “…the stakes for lenders at a time when the credit cycle appears to have passed a peak.”
He goes on to cite recently released second quarter data showing significant year over year changes to credit card loans by some of the country’s largest lenders:
- Wells Fargo: 10%
- Citigroup: 12%
- U.S. Bank 16%
- SunTrust: 26%
While he points out that delinquencies continue historically low, there are some other ‘early indications’ that the cycle is beginning to turn.
For example: “Synchrony Financial, the largest supplier of store-branded cards in the U.S., sent a shudder through the sector in June when it increased its forecast for credit losses.”
Other banks have boosted reserves for potential losses, among them Capital One which added $375 million to its loan loss reserves, and JPMorgan Chase added $250 million.
Many banks are pushing hard for the credit card business, which of course carries much higher interest rates than other types of personal loans. The logic being that they are targeting consumers with good credit ratings, who are in good financial shape, employed, and seeing their spending confidence boosted by increases in home prices.
So, is the parrot dead, or is it just “…pining for the fjords”?
There seems to be no clear answer. However, we continue to urge vigilance on the part of our customers to maintain focus on their bad debt so as not be caught off guard by a sudden economic swing. Let us help keep your collections in good shape wherever the story goes!
Founded in 1950, United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing effective, customized one on one management and recovery solutions for our business partners. Visit our website at http://www.unitedcreditservice.com, call 877-723-2902 or check out our YouTube video.